Jeff Coles of Berkadia on Single-Family Rental/Build-for-Rent Markets
Jeff Coles is Vice President of Institutional Client Services with Berkadia, Washington, D.C. He partners with Dori Nolan, Senior Vice President of Client Services, to grow Berkadia’s relationships with current and new institutional investor clients. In addition, he leads Berkadia’s Single-Family Rental & Built-for-Rent specialty, which provides a full spectrum of advisory and capitalization services. He joined Berkadia in 2017 as Senior Director with DC Metro Multifamily Investment Sales. Prior to joining Berkadia, he advised on more than $5 billion in multifamily investment sale transactions.
Coles is an active member of the National Multifamily Housing Council, where he serves as Vice Chairman on its Diversity, Equity, and Inclusion Committee, and is a member of The Real Estate Executive Council, a leading trade organization formed to promote the interests of minority executives doing business in commercial real estate. Additionally, he is an active volunteer with the newly developed DC Dream Center, a $4.2 million community-based center providing mentorship, personal development and legal support for underprivileged residents of Washington, D.C.
MBA NEWSLINK: The SFR/BFR housing market is receiving intense interest from institutional investors. Which markets have seen the most interest? Which markets are quickly gaining interest?
JEFF COLES, BERKADIA: Transaction activity has mostly concentrated in the major Sunbelt and Western markets across the U.S. in states such as California, Arizona, Texas and Florida, where there has been a major increase in population from people seeking lower tax and cost alternatives. Specific markets quickly gaining investor interest are Denver, Las Vegas; Nashville; Atlanta; Charlotte; and suburban Chicago, among others. These markets are projected to have some of the highest positive migration in the country.
NEWSLINK: Do favored product types vary by region?
COLES: Yes. They can vary widely and will depend on demand, affordability and demographics. Generally, the different product types are prevalent in the following markets:
–Single-family detached communities can be found in areas like Phoenix; San Antonio and Houston; Jacksonville and Orlando; Augusta, Ga., and Charlotte, N.C. This product type consists of traditional single-family detached homes on traditional lots, 3BR/2BA – 4BR/3BA ranging from 1,400 sq. ft. – 2,000 sq. ft.
–Single-family attached communities can be found in areas like Tacoma, Wash.,, Reno, Nev., Des Moines, Iowa, Indianapolis, Lansing, Mich., Huntsville, Ala., and Greenville, S.C. These designs are usually 2BR/2BA – 4BR/2.5BA ranging from 1,300 sq. ft. – 1,750 sq. ft.
• Horizontal Apartment communities can be found in Tucson, Flagstaff, and Phoenix, Ariz.; Denver suburbs, Kansas City, Mo., Bradenton, Fla., and Myrtle Beach, S.C., and are small single-family detached and attached homes ranging from 1BR/1BA to 3BR/2BA (650 sq. ft. – 1,400 sq. ft.).
• Townhome communities can be found in Tacoma, Fresno, Riverside, and San Diego, Calif., Boise, Idaho, Salt Lake City, Utah, Dallas, Austin and Houston; Nashville, Tenn., and most coastal Florida markets. These typically range from two to seven unit building configurations containing 2BR/2BA to 3BR/2.5BA (1,100 sq. ft. – 1,400 sq. ft.).
NEWSLINK: Which financing methods are available for investors?
COLES: Currently, the Single-Family Rental and Build-For-Rent spaces are very much in their adolescence, especially in comparison to traditional multifamily. This takes the form of fewer market players, and many large players in the capital markets still sitting on the sidelines.
However, this is still in large contrast to where the market was just two years ago— with only a handful of active lenders. Initially the space saw a handful of debt funds that would structure smaller credit facilities or bridge type acquisition lending as well as regional bank lenders that were more sponsor relationship driven, all of which demanding large returns with the knowledge that these markets still lack liquidity.
Over the past 24 months, more than $80 billion has been formally announced to invest in the Single-Family Rental vertical with a substantial amount more announced. We are now seeing capital get creative with structuring in order to capitalize on the large financing opportunities in the SFR/BFR space. That said, we feel equity has been more creative and flexible, while the debt markets are still very immature, but improving.
The SFR market consists of four primary tranches:
–The first tranche is the sub-$10 million space, where there are many players, often debt fund-type structures that demand outsized returns for being the only players in the space. Verus, Corevest, Kiavi, etc. These capital providers are easy to work with, move quickly, and do understand the space well, but demand higher rates and fees. Structurally, these same lenders will provide multiple types of lending products including short-term acquisition/bridge debt, credit facilities, construction financing and longer-term permanent executions.
We are also seeing very regionalized execution from local banks that understands the market the collateral is in, while being very sponsor driven. Typical structures from the banks are short-term loans (3-5 years) or floating rate acquisition lines.
–The second tranche is in the $10 million – $100 million space and consists primarily of large capital funds and a small, but growing, contingency of life insurance companies. This is by far the thinnest tranche and requires a level of sophistication and capitalization of the borrower that the first tranche does not. Their rates are competitive but lower than the first tranche, and fees are reasonable and comparable to multifamily and other commercial loans.
–The third tranche is in the $100 million+ space and consists primarily of a handful of global banks and a few larger life insurance companies. These groups use facilities and aggregation loans in order to generate business for their SFR securitization business, where their true focus is. Rates in this tranche are extremely competitive, and terms are not to be beat—but only offered to top tier and institutional sponsors.
–The fourth tranche is for single-asset Build-For-Rent communities, where the agencies (Fannie Mae and Freddie Mac) dominate the space. They consider these assets comparable to multifamily, and as such, can finance them with their conventional multifamily programs, often offering extremely competitive terms with low rates, nonrecourse and interest-only.
NEWSLINK: Has the profile of today’s SFR renter changed from that of years ago? Do Millennials look for different product than Baby Boomers?
COLES: Yes, on a percentage basis by cohort, 45 percent of mature singles and couples are SFR renters by preference, followed by young singles and couples where 34 percent prefer to rent. However, the largest number of SFR renters by age are 25 – 34-year-olds at 3.7 million and 35 – 44-year-olds at 3.6 million. A shift toward younger renters has been prevalent over the past five years.
Regarding product types (and market depending), Baby Boomers tend to downsize and seek smaller well-managed properties which are single level detached or horizontal apartments. Millennials tend to prefer single-family detached for their growing families and horizontal apartments and townhomes for their affordability.
Overall, there is no hard rule as to product preference. This is a fast-growing segment of the housing market. It is continuing to evolve and appeals to a wide range of potential renters.
NEWSLINK: What do you expect from the SFR/BFR market in the next year? Next five years?
COLES: No one has a crystal ball. Certainly, I do not. However, as far as expectations over the next year:
• Nationally, home prices will continue to rise but not as quickly as before. However, some ridiculously priced overheated markets will see pricing reduce to late 2021 pricing. Rising mortgage rates will cause softening in the for-sale market. This will continue to put pressure on home affordability and increase demand for single-family rentals.
• There will be an increased adoption of SFR/BFR asset class by investors and demand from renters (particularly as entry-level homes become more difficult to afford). Demand in the Sunbelt markets will continue to be strong, Coastal markets will gain more interest due to the lack of affordability of for-sale housing, and new markets will emerge in this space as adoption of the asset type moves up the coasts and further into mid-western markets with good demographics.
• Institutional investor interest will increase as SFR/BFR continues to outperform traditional multifamily, as renters are riding a wave of accelerating job growth and surging wages (especially in the many markets where wage growth is above the rate of inflation).
Regarding the next five years, I expect:
• The SFR/BFR market to continue to outperform traditional multifamily as this product type is far from being overbuilt.
• Rents will continue to grow and outpace other product types.
• Demand for this space will continue as the housing market is conservatively undersupplied by 1.7 million units (some experts say over 3 million).
• Demand will further increase due to the price burden of entry-level homes continuing to increase.
• This product type will be adopted in newer markets outside of the Sunbelt and Midwest.
• Increased financing options will be provided including affordable financing alternatives.
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